People always talk about how buying a home is the only way for the common person to obtain leverage. Please excuse my ignorance, but how does the common person use that leverage, exactly?
Leverage in finance is the concept of buying an asset with money that's not yours (i.e. a loan).
So suppose you have $100, and you believe a stock will increase by 10% in value, then borrowing $900 and buying $1000 of the stock, will leave you with $1100 if your prediction is true. When you pay off the loan, you'll be left with $200, and you will have doubled your money.
The loan thereby acts as a leverage multiplying the 10% return on investment to in this case a 100% return on investment.
Now imagine that instead of having $100, you have $50k, and instead of borrowing $900, you borrow $450k, and instead of buying stock, you buy a home with the 50k deposit and 450k mortgage. The same applies, the home appreciates 10% to 550k, but your equity increases from $50k to $100k. Again, the mortgage loan acts as a lever.
The difference is that most consumers do not have large and cheap capital available to them, say to borrow $450k to invest in the stock market. But most people do have such opportunities to invest in the real estate market with a mortgage.
Anyway, wether it's a good investment really depends on many factors. The NYT buy or rent calculator is still one of the best sources to get an intuition on what is best for your circumstance. https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...
Right, my question is more about how the average person can actually use that leverage. So you've got $80k in leverage, it grows (presumably), but how do you actually use it?
You have to sell the house, right? So you can only cash in on that leverage when you reverse mortgage or otherwise downsize, right?
Yes, but thanks to leverage you have effectively created higher returns for your retirement portfolio than you would have been able to without the leverage.
Higher returns than what though? It sure sounds like the only financial advantage to owning a home vs other investments is the leverage. Yet the S&P will return far more even considering the 80% leverage in most cases.
If you take all the money that you have spent on a down payment, closing and selling costs, taxes, and maintenance, subtract rent, and put the remainder in a market index fund, for the vast majority of situations you will have FAR more money by retirement. Like it's not even close.
I guess I'm just a bit tired of the messaging that real estate is such a great financial investment. Historically it's better than a lot of options but not even close to the best investment vehicle. Houses are homes first, not money makers, and if we continue to emphasize the latter, we will never solve the housing affordability crisis.
So suppose you have $100, and you believe a stock will increase by 10% in value, then borrowing $900 and buying $1000 of the stock, will leave you with $1100 if your prediction is true. When you pay off the loan, you'll be left with $200, and you will have doubled your money.
The loan thereby acts as a leverage multiplying the 10% return on investment to in this case a 100% return on investment.
Now imagine that instead of having $100, you have $50k, and instead of borrowing $900, you borrow $450k, and instead of buying stock, you buy a home with the 50k deposit and 450k mortgage. The same applies, the home appreciates 10% to 550k, but your equity increases from $50k to $100k. Again, the mortgage loan acts as a lever.
The difference is that most consumers do not have large and cheap capital available to them, say to borrow $450k to invest in the stock market. But most people do have such opportunities to invest in the real estate market with a mortgage.
Anyway, wether it's a good investment really depends on many factors. The NYT buy or rent calculator is still one of the best sources to get an intuition on what is best for your circumstance. https://www.nytimes.com/interactive/2024/upshot/buy-rent-cal...